Although some U.S. sponsors continue to expand their existing asset portfolios and launch new conduits, we expect asset-backed commercial paper (ABCP) issuance to remain unchanged from April through year-end. While we are monitoring the economic effects of the COVID-19 pandemic, we believe our ratings on outstanding ABCP will remain stable amid steady or slightly weakening credit performance of the underlying assets and challenging conditions for financial institutions, which provide liquidity facilities to the programs.

In Europe, the Middle East, and Africa (EMEA), we observed continued market interest from new conduit sponsors in 2019. Issuances from the programs we rate increased moderately during 2019, but committed funding amounts declined for the first time in three years. While regulatory and Brexit-related uncertainties have tapered, we expect any growth in issuance volume to be muted or even decline due to the general economic impact of COVID-19. We however expect our ratings on ABCP conduits to remain stable in the near term, as tighter funding conditions are unlikely to cause widespread problems for the liquidity facility providers.

In Australia, total ABCP outstanding in December 2019 decreased to A$300 million from A$400 million in December 2018, continuing the trend from six months earlier. In Japan, after some growth last year, total ABCP outstanding in December 2019 declined 9% to ¥208.84 billion since December 2018. Utilization rates in Japan have been low, compared to global trends, likely because of the current lending environment and availability of credit.

COVID-19: Credit-Related Sensitivity For ABCP Is Largely Secondary

S&P Global Ratings acknowledges a high degree of uncertainty about the rate of spread and peak of the coronavirus outbreak. Some government authorities estimate the pandemic will peak about midyear, and we are using this assumption in assessing the economic and credit implications. We believe the measures adopted to contain COVID-19 have pushed the global economy into recession (see our macroeconomic and credit updates here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.

Unlike natural disasters, where the result is localized and immediate, and consequently the influence on obligor's credit quality is more predictable, the ultimate effect of COVID-19 remains uncertain in terms of magnitude, location, and duration because of the fluidity of the situation. Given the widespread precautionary measures put in place globally, COVID-19 is most likely to have a geographic footprint well beyond that of localized natural disasters.

For fully supported ABCP programs, we consider COVID-19 credit-related sensitivity to be secondary as opposed to primary (see chart 1). This is because, given the full support, ratings on these programs are weak-linked to the issuer credit ratings on the liquidity facility provider, whereby rating actions are generally driven by those on the dependent counterparty (i.e., the liquidity facility provider, in this case). A change in the rating outlook for a liquidity provider would not affect the ratings on the ABCP. However, a downgrade or CreditWatch placement, which could affect the short-term rating on the liquidity provider, could affect the rating on the ABCP.

For partially supported ABCP programs, we also consider asset performance in our analysis, and we would typically expect conduits with underlying commercial assets, such as rental cars or dealer floor plans, to be generally more sensitive to the credit impact from COVID-19, compared to consumer assets, such as auto loans and leases, student loans, and credit cards. Our base-case loss assumptions for all the partially supported transactions are higher than the current loss performance and reflect our view of expected performance during multiple economic scenarios specific to the asset-backed securities (ABS) sector. That said, we will continue to monitor any deterioration in collateral performance over time.

Overall, we expect slower issuance growth through the rest of the year due to the economic impact from the pandemic and related market uncertainties. Nevertheless, central banks have initiated liquidity support measures such as the Commercial Paper Funding Facility (CPFF) and Money Market Mutual Liquidity Funding (MMLF) in the U.S.; the Pandemic Emergency Purchase Program (PEPP) in EMEA; and the increase in the purchase limit under the existing asset purchase program for commercial paper in Japan. If ABCP funding costs remain elevated, banks may opt for liquidity draws or bank-committed facilities instead. Therefore, these central bank measures could support ABCP issuance if relative funding costs decline as a result.

Chart 1

U.S.: Stable Ratings And Flat Issuance Expected Through Year-End

Dev Vithani, New York, (1) 212-438-1714; dev.vithani@spglobal.com  

Cathy C de la Torre, New York, +1 (212) 438-0502; cathy.de.la.torre@spglobal.com  

For U.S. ABCP in 2020, we expect issuance volumes to remain unchanged from the current levels as of April. According to the Federal Reserve, U.S. ABCP outstanding grew approximately 1.9% to $254.8 billion in 2019 from $250.1 billion in 2018. U.S. ABCP outstanding stood at $267.2 billion as of April 15, 2020, approximately 4.9% higher than year-end 2019, and we expect it to remain within the range of $260 billion-$270 billion by December. Similarly, U.S. ABCP outstanding rated by S&P Global Ratings has grown 13% to $216.6 billion as of December 2019 from a 2016 low of $191.9 billion.

Since the beginning of fourth-quarter 2019, we have rated ABCP issued by two new programs: Mackinac Funding Co. (February 2020) and GTA Funding (March 2020). During this time, we withdrew our rating on ABCP issued by White Plains Capital Co. LLC. However, we did not lower ratings on ABCP issued out of any of the programs.

We expect stable U.S. ABCP ratings against challenging economic backdrop

The global spread of COVID-19 has suddenly halted the U.S. economy, resulting in a recession, which will potentially cause U.S. growth to contract by as much as 5.2% (see "An Already Historic U.S. Downturn Now Looks Even Worse," published April 16, 2020). Nevertheless, in a recession scenario, we expect stable rating performance for U.S. ABCP based on the high-investment-grade ratings on bank sponsors and extensive experience of nonbank sponsors. This is partially because even if the long-term issuer credit ratings on some of the larger players in the ABCP market fell by one notch, their short-term ratings would not necessarily change. For instance, we derive 'A-1' short-term ratings when the long-term ratings are either 'A+' or 'A' based on our linking methodology (see "Methodology For Linking Long-Term and Short-Term Ratings," published April 7, 2017).

ABCP conduits are actively managed, and our ratings on the ABCP are based on ratings on the liquidity and credit support providers (predominantly banks) and the credit quality of the assets funded in programs (see "When The Cycle Turns: How Would Global Structured Finance Fare In A Downturn?" published Sept. 9, 2019). Banks have entered the recession with good fundamentals, supported by low levels of nonperforming assets, sound capital, and liquidity. In addition, the extraordinary actions the Fed has taken to support market and bank liquidity and the recently-passed stimulus bill from the federal government should be beneficial for banks. Still, the impact of COVID-19 on these institutions will depend in large part on its duration and severity, as well as the time that the economy remains in lockdown. It will also depend on the effectiveness of the U.S. government's fiscal stimulus package and its ability to allay the near-term economic impact, particularly for those industries and consumers most exposed to the current economic shock. Finally, lower interest rates, while meant to offset the pandemic, will likely pressure banks' profitability (see "Scenarios Show How U.S. Bank Ratings Could Change Amid Pandemic-Induced Financial Uncertainty," published March 24, 2020, and "COVID-19 And Falling Rates Cloud The Outlook For U.S. Financial Institutions," published March 10, 2020).

Despite the potential slowdown for banks and the expected steep decline in the U.S. consumer sector, which will last at least until June 2020 due to social distancing, the projected moderate recovery in consumer spending activity for the second half of the year could have a favorable impact on outstanding ABCP.

Unlikely to see a change in incentives for short-term funding

In recent years, the Fed's interest rate hikes accompanied by a normal (or steeper-upward-sloping) yield curve helped to make short-term borrowing more attractive compared to costlier long-term loans. This generally benefited the short-term ABCP sector by incentivizing issuers to fund assets through lower-cost ABCP funding. In 2019, the Fed reverted to implementing expansionary monetary policy, including quantitative easing, to inject more liquidity into the system. The resulting decrease in policy rates limited ABCP growth because companies that previously used conduits for short-term funding opted to borrow funds at historically attractive rates via long-term corporate bond issuances and bank loans. This is likely to continue into 2020 as the Fed cut its benchmark rate 50 basis points on March 3, slashed interest rates to near zero on March 15, and announced unlimited quantitative easing on March 23. The Fed's actions were among other wide-ranging measures implemented by the government to help insulate the U.S. economy from the negative effects of the COVID-19 outbreak.

Banks, which typically serve as sponsors and administrators for ABCP programs, must cope with declines in net interest margins--a measure of a bank's interest income relative to interest on deposits. These margins will likely drop to levels near those in late 2015 when the Fed began raising rates. Banks are also supported by low to mid-single-digit loan growth and robust levels of deposits relative to loans (see "Large U.S. Bank Earnings Should Remain Buoyant, Despite Margin Headwinds In The Fourth Quarter," published Feb. 13, 2020). Therefore, their need for non-deposit funding, including ABCP, may remain subdued.

Besides investor and funding diversification, we do not expect a more significant change in incentives for short-term funding until we begin to see the yield curve steepen. However, the ABCP sector still offers a unique product to investors and serves not only as an alternative capital market-based funding source for banks, but also as a viable funding source to fuel economic growth.

Interest in ESG assets growing, though some obstacles remain

We have observed increased interest, though still in the nascent stages, in ABCP programs backed by assets viewed as having strong environmental, social, and governance (ESG) credentials. However, assets considered to have strong ESG credentials could be viewed as riskier from a credit quality perspective, or vice versa. In our view, there are also some hurdles to overcome before there is widespread adoption of ESG in structured finance. These include a lack of capital market standard or market consensus of the definition of ESG and "green"; confidentiality issues; inconsistent disclosures and data reporting; varying views on how to score and weigh ESG factors; and continued monitoring of the ESG designation. Specifically for ABCP, the ESG credentials of the sponsor, administrator, or liquidity provider could also be materially different from the underlying asset or seller, or the seller's obligors (see "ESG Credit Factors In Structured Finance," published Sept. 19, 2019).

Two new programs rated since October 2019

Total S&P Global Ratings-rated ABCP outstanding in the U.S. from 2014 to 2019 has remained relatively steady at $191.9 billion-$216.6 billion (see chart 2). Of the $216.6 billion outstanding as of December 2019, approximately 78.6% had a short-term 'A-1' rating, 21.3% was rated 'A-1+', and 0.1% was rated 'A-2'.

The three largest sponsors, Citibank, JPMorgan, and Royal Bank of Canada, represent the eight partially supported programs totaling $57.1 billion ABCP outstanding and make up 26% of the total U.S. ABCP that we rate (see Appendix). The remaining 39 programs in the U.S. are fully supported and total about $159.5 billion, or 74% of the total U.S. ABCP that we rate (see Appendix).

From October 2019 to March 2020, we have rated ABCP issued by two new fully supported conduits: Mackinac Funding Co. LLC (Mackinac) and GTA Funding LLC. Mackinac is a conduit with a unique structure that is similar to Columbia Funding Co. LLC (sponsored by Nearwater Capital) launched in June 2019. It uses proceeds derived from a global master securities lending agreement and a total return swap to purchase U.S. Treasuries and loans to banks to hold as high-quality liquid assets (see "New Issue: Mackinac Funding Co. LLC," published Feb. 26, 2020). GTA Funding LLC is a multiseller conduit that is intended to finance consumer and commercial assets (sponsored by The Toronto Dominium Bank; see "New Issue: GTA Funding LLC," published March 27, 2020).

In April, we withdrew our rating on ABCP issued by White Plains Capital Co. LLC (managed by Guggenheim Treasury Services LLC) at their request (see "White Plains Capital Co. LLC Rating Affirmed; Ratings Then Withdrawn At Issuer's Request," published April 15, 2020).

Chart 2

U.S. dollar-denominated issuances continue to account for most ABCP outstanding

U.S. dollar-denominated ABCP issuances in 2019 continued to account for the majority of the ABCP outstanding in the U.S., with 98% denominated in U.S. dollars, while the rest of the issuances were denominated in euros and British pound sterling (see chart 3).

Chart 3

Key trends in asset composition and credit risk

We consider credit risk an important factor in partially supported programs, which rely on sponsors to provide liquidity, but the underlying assets cover the credit risk, typically in the form of credit enhancement.

Under a recession scenario, we expect relatively stable credit performance for investment-grade ratings on the underlying assets, and if asset quality deteriorates, conduit sponsors can utilize fungible program-wide credit enhancement or remove a transaction from the conduit.

For ABS, we expect overall stable rating performance, albeit with pockets of potential weakness in some sectors and regions. The risk of downgrades and defaults is higher for classes assigned speculative-grade ratings. As of December 2019, traditional assets--such as auto loans and leases, credit cards, student loans, consumer loans, and equipment loans and leases--made up about 76% of collateral in partially supported programs (see Appendix). The following sections provide a breakdown of performance by asset type.

Chart 4

Chart 5

Auto loans and leases  

Auto loans and leases account for 47% of the collateral in partially supported programs and 24% of all ABCP conduit portfolios (see charts 4 and 5). These assets remain dominant staples and serve as vital alternative funding sources for large auto issuers.

In our view, auto loan ABS collateral losses are likely to rise in tandem with unemployment levels, but on a slightly lagged basis. Higher losses will follow a period of elevated extensions granted by lenders and a rise in delinquencies. When delinquent accounts pass their normal charge-off period or some obligors willingly surrender their vehicles, there will likely be higher full-balance charge-offs. Recoveries could be delayed by the inability to repossess and liquidate vehicles due to COVID-19 related closures of certain government offices, towing businesses, and auction houses.

We believe the auto loan securities most at risk of downgrade are speculative-grade (those rated 'BB+ (sf)' or lower) subprime auto loan ABS. By definition, these classes have lower credit enhancement with which to cover higher-than-expected losses. Subprime pools vary widely in terms of cumulative expected loss levels, ranging from 10% to 28%.

Certain prime auto loan ABS could also be vulnerable to downgrade. Based on the rating performance from the Great Recession, however, we believe these would be largely confined to 'BBB (sf)' rated classes where the base case is particularly low (such as 0.8% to 1.0%). Additionally, those pools that straddle the fence between prime and subprime, which we often refer to as "nonprime," have demonstrated a volatile track record of losses and could, at the low-investment-grade and lower levels, be vulnerable to downgrades (see "The Potential Effects Of COVID-19 On U.S. Auto Loan ABS," published March 26, 2020).

Credit cards  

Credit cards make up 7% of the collateral in partially supported ABCP programs and 4% of the total ABCP that we rate (see charts 4 and 5).

The likelihood of obligors not satisfying their credit card payment obligations will depend on their income curtailment. In the short-term, we expect delinquencies to be elevated, which could result in increased charge-offs (losses) depending on the duration of the dislocation from COVID-19. In our view, credit card issuers' forbearance considerations, employers' assistance, and government efforts to provide financial assistance and other stimulus measures will lessen the burden faced by many obligors and, as a result, will reduce delinquencies and losses.

Our base-case assumptions for the key performance variables generally incorporate a cushion when compared with the current performance to account for potential migration of the credit quality of the receivables over time. They also reflect our view of expected performance during multiple economic scenarios and forecasted economic variables such as unemployment levels and bankruptcy rates. Our current base-case loss assumptions are well above the actual trust loss rates (4.75%-7.5% compared with 1.6%-4.7% actual losses for bankcards and 4.0%-10.5% compared with 3.0%-9.0% actual losses for private label cards). As a result, given our current macroeconomic outlook for the impact of COVID-19, there remains a cushion in our base-case assumptions to mitigate the expected increase in loss rates (see "Credit FAQ: Assessing The Credit Effects Of COVID-19 On U.S. And Canadian Credit Card ABS," published March 25, 2020).

Student loans  

Student loans make up 11% of the collateral in partially supported ABCP programs and 6% of the total ABCP that we rate (see charts 4 and 5). The growth in originations in 2019 for the private student loan sector in both the refinance and in-school channels did not lead to greater ABS issuance, suggesting that originators may have been accessing the whole loan market or simply holding more loans on their balance sheets. Federal Family Education Loan Program (FFELP)-backed ABS declined 25% in 2019 to just under $6 billion, as FFELP loans (which ceased being originated in 2010) continued to run off.

Consumer loans and mobile handsets  

Consumer assets--including personal loans and mobile handsets, among others--make up 8% of the collateral in partially supported programs and make up about 6% of the total assets funded through ABCP (see charts 4 and 5). There is growing interest in these newer and unique asset types because conduit transactions can test investor appetite for the assets before they are potentially included in term ABS issuance. For instance, in personal loans from marketplace platforms, we continue to be cautious in the face of legal uncertainty surrounding the "valid when made" doctrine and who the "true lender" is. For mobile handsets, our ABS ratings are driven by the operational risk link between the loan obligors and the network carrier from which they contract service at the time of the phone purchase.

Trade receivables  

Trade receivables make up only 5% of the partially supported programs, but they are the second-largest staple asset at 9% of the invested amount of the ABCP that we rate (see charts 4 and 5). Trade receivables are typically revolving, short-term assets and used for capital-market funding for middle-market clients' working capital needs.

Nontraditional assets  

Nontraditional assets make up 30% of the total ABCP that we rate but make up only about 6% of the partially supported programs (see charts 4 and 5). We have observed an increasing appetite for these assets, which include servicer advances, contract payment rights, and repurchase agreements. We believe that these assets subject the collateral pool to higher credit risk, which is mitigated by sponsors who typically cover both the liquidity and credit risk in fully and partially supported programs.

Commercial assets  

Commercial assets still represent a sizable portion of conduit portfolios. Commercial assets make up 17% of the total ABCP that we rate and make up 16% of the partially supported programs (see charts 4 and 5). We have observed continued investor interest for these types of assets, which include commercial loans and leases, floorplan, fleet lease, railcar, and container leases, among others. The commercial ABS sector encompasses a wide variety of industry and equipment types and servicers, ranging from small-ticket independent lessors to larger-dollar captive financing companies.

We believe that ABS transactions originated by small, independent finance companies, regardless of specific equipment type--especially those with exposure to small retail businesses in the restaurant and hospitality industries--are most at risk of immediately experiencing elevated levels of deferrals, delinquencies, and losses. For those businesses that provide financing to other parts of the commercial equipment space (i.e., auto fleet lease, agricultural production equipment, and large-ticket equipment, such as enterprise servers), these collateral pools may experience elevated levels of credit stress if the economic disruption is prolonged (see "U.S. Commercial Small-Ticket ABS Will Be First In Sector To Feel Impact Of COVID-19," published April 13, 2020). Although we would expect some of the commercial assets to be generally more sensitive to the credit impact from COVID-19, our current base-case loss assumptions remain above actual loss performance.

EMEA: Issuance Expected To Plateau In 2020

Matthew S Mitchell, CFA, London, (44) 20-7176-8581; matthew.mitchell@spglobal.com  

Florent Stiel, Paris, (33) 1-4420-6690; florent.stiel@spglobal.com  

The total S&P Global Ratings-rated ABCP outstanding as of December 2019 from conduits domiciled in EMEA increased a moderate 3.14% over 2018, furthering the momentum gathered in 2017. Issuance volume at the end of the year was marginally short of $100 billion. However, since we now expect the eurozone economy to contract 7.3% in 2020, we anticipate new issuance to remain muted or potentially decline during the year.

The uncertainties over the eligibility criteria for the simple, transparent, and standardized (STS) securitizations implemented last year have now largely moderated. However, any growth in ABCP issuances will likely be affected by weak market sentiment, at least during the first half of the year, with a possible modest recovery beginning thereafter, depending on the extent economic activity starts to improve. The European Central Bank's PEPP and similar measures in the U.K., if the Bank of England potentially includes ABCP in the COVID-19 Commercial Financing Facility, could to some extent support ABCP issuance depending on the impact on funding costs. If ABCP spreads remain wide, we would expect reduced issuance as banks may choose to fund via liquidity draws or other credit facilities instead.

All issuances from conduits domiciled in EMEA are currently fully supported by liquidity. This means that our ABCP ratings are weak-linked to the issuer credit ratings on the liquidity providers, or in the case of conduits funding investment contracts, the minimum issuer credit rating on the series counterparties. As such, we consider ABCP ratings to be secondary risk to COVID-19 in EMEA, as the underlying asset credit quality is not material to our analysis.

The vast majority of European financial institutions we rate entered 2020 with healthy capital, solid liquidity, and benign asset quality metrics. Therefore, while their solid balance sheets will help in dealing with the effect of COVID-19 on European economies, we expect rising credit losses and falling revenues will be dominant features for European banks in 2020. In the near term, tighter funding conditions are unlikely to cause widespread problems for most of the banks we rate, including the liquidity providers and series counterparties. However, should COVID-19 lead to a more protracted recession than we currently anticipate, this would hurt bank's loan portfolios more severely than in our base case, further increasing the pressure on their creditworthiness.

Based on total ABCP outstanding as of December 2019, U.S.- and Japan-based financial institutions provide the liquidity facility for about 7% and 4% of the conduits we rate, respectively. These counterparties currently have a positive or stable outlook.

In view of the above, we expect that ABCP conduit ratings in EMEA will remain stable. As mentioned previously, for fully supported programs, a change in the short-term rating on the liquidity provider could affect the rating on the ABCP. We will continue to monitor any impact on our ratings on the conduits as a result of the economic implications from the COVID-19 pandemic.

Issuance rose in 2019, but committed funding amounts declined

Total ABCP outstanding in EMEA continued to increase in 2019, rising 3.1% to $98.9 billion as of December 2019. Overall volumes, which increased 31.9% in December 2017 from the December 2014 low of $72.9 billion, continued to gather momentum this year, albeit at a slower pace (see chart 6). In 2019, we rated two new programs: Satellite, sponsored by Crédit Industriel et Commercial, which funds traditional assets such as trade receivables, auto loans, and auto leases; and Chesham Finance Ltd.'s segregated series VII, sponsored by BSN Holdings Ltd., which funds investment contracts with Citibank N.A., Citigroup Global Markets Inc., and/or Citigroup Global Markets Ltd. as series counterparties (see related research). At the same time, we withdrew our ratings on General Funding Ltd. in November 2019.

Committed funding amounts declined 4.5% in 2019, as opposed to a 2% increase in 2018. Despite growth in commitment amounts on new conduits we rated, we observed a reduction in a few existing conduits. Overall utilization rates across programs remained largely stable for the majority of the conduits, although some increased since December 2018. In our view, given the expected impact of the COVID-19 pandemic on the financial sector, much of any new issuance from conduits will be limited to existing funding commitments, and we expect few new seller additions until more normal operating conditions resume.

Chart 6

British pound-sterling denominated issuances surge

U.S. dollar-, euro-, and British pound sterling-denominated ABCP issuances continued to account for more than 99% of the ABCP issued by European conduits. Euro-denominated issuances fell 5.2%, furthering a trend we observed in the first six months. This caused their overall share to reduce to about 32% from nearly 35% last year. Market preference shifted to U.S. dollar- and British pound sterling-denominated issuances. In 2017, U.S. dollar-denominated picked up, a trend which continued steadily in 2019. On the other hand, British pound sterling-denominated issuances, which contracted 18.2% in 2018 on the back of Brexit-related uncertainties, rebounded by the end of 2019, gaining 32.5%, to reach a six-year high (see chart 7).

Chart 7

The share of total ABCP outstanding funded by single-seller programs climbed 4% over 2018 to about 11%, to some extent driven by issuances from the new single-seller programs we rated in 2018 and 2019. Similarly, the share of 'A-1+' rated programs improved because of the issuances from Longship Funding DAC, while the share of 'A-2' rated programs has fallen slightly as all ABCP outstanding in relation to Silver Tower Funding Ltd. have been redeemed (see Appendix).

Investment in commercial assets continued to expand

Total asset investments in EMEA remained largely stable, rising less than 1% over 2018, with increases in commercial and consumer assets offset by some decline in trade receivables and auto (see chart 8).

Chart 8

Traditional assets such as trade receivables and autos now account for about 61.1% of total asset investments, down from 65.5% a year ago. Concurrently, we observed a sharp growth in issuances from conduits funding investment contracts such as repurchase agreements, total return swaps, and securities lending agreements, which, based on our understanding, is driven by favorable capital treatment and diversified sources of liquidity for counterparties. This has improved investments in commercial assets, which now form about 22.1% of all investments, up from 18.7% in 2018.

Of all assets, 83% are domiciled across various regions within EMEA, increasing from 80% in 2018. This was primarily driven by the 3.7% increase in assets originated in the U.K., which now form about 35.1% of total investments, growing from around 30% in 2017. A quarter of assets continue to be domiciled in Italy, France, and Germany. Assets originated in the U.S. contracted to around 6%, having stayed steady at about 7%-8% over the last two years. We observed some growth in assets originated from Austria, Hong Kong, Denmark, and South Korea, although these regions together formed less than 2% of the total.

Australia: Continued Reduction In Outstanding Volumes

Justin Rockman, Melbourne, (61) 3-9631-2183; justin.rockman@spglobal.com  

Total ABCP outstanding in December 2019 decreased approximately 12% to A$300 million from A$342 million, continuing the trend from six months earlier (see chart 9). Total liquidity backing ABCP programs remained stable at A$400 million in December.

Chart 9

Until 2014, about 80% of all issuance was denominated in Australian dollars, and another 12%-18% was denominated in U.S. dollars. However, U.S. dollar-denominated issuance contracted significantly thereafter, with no Australian programs funding in the U.S. (see chart 10).

Chart 10

Currently there are two ABCP programs outstanding. Waratah Securities Australia Ltd. and Sydney Capital Corp. Inc. are partially supported multi-seller programs rated 'A-1+', which can issue in both the Australian and U.S. markets and have a callable note program. Liberty Sirius Series is an 'A-1' rated single-seller program established to fund residential mortgage loans, originated by an Australian nonbank lender. The ratings on both programs are linked to the liquidity and credit facility providers.

Investments are concentrated in residential mortgages

Because Waratah Securities Australia Ltd. and Sydney Capital Corp. are not actively issuing, residential mortgages make up most of the assets underlying ABCP programs, with a proportion held in cash temporarily due to the sale of underlying assets from one of the programs (see chart 11).

Chart 11

A contracting economy in the short term, rising unemployment, and depressed consumer and business sentiment in the wake of the COVID-19 outbreak have increased the risks for property prices and consequently the financial system in Australia. Liquidity stress and an increased proportion of borrowers unable to make scheduled loan repayments will affect the cash flows to Australian residential mortgages. Policymakers have announced stimulus measures to soften increasing financial hardship. Australian banks have announced support measures for households and small business customers affected by the COVID-19, including temporary relief from home-loan repayments. These measures should help stabilize underlying borrower creditworthiness for RMBS transactions.

Japan: Issuance Volumes Declined In 2019

Toshiaki Shimizu, Tokyo, (81) 3-4550-8302; toshiaki.shimizu@spglobal.com 

ABCP is a traditional form of securitization in Japan. Currently there are two ABCP programs outstanding, which were established by AOI Funding Corp. and Apex Funding Corp. Both conduits are multi-seller programs fully supported by Japanese banks--The Shizuoka Bank Ltd. and MUFG Bank Ltd.--based on the liquidity and credit facility agreement. Therefore, the ratings on both programs remain linked to our short-term credit ratings on the banks. These conduits are set up to finance their acquisition of assets such as trade receivables by issuing yen-denominated ABCP. There have been no specific changes since 2012. Currently, there are no scheduled legal or regulatory changes that would affect ABCP issuances in the Japanese market.

In 2009, there were four ABCP programs in Japan. We withdrew our ratings on two programs in 2012 following their closure and upon the related transaction party's request (see chart 12).

Chart 12

Total ABCP outstanding in December 2019 declined 9% to ¥208.84 billion since December 2018. Issuance volumes remained well below historical highs. Utilization rates in Japan have been low, compared to global trends, likely because of the current lending environment and availability of credit. To date, all issuances by Japanese conduits have been denominated only in Japanese yen.

Global Top 10 Sponsors

Globally, as of December 2019, the top 10 sponsors are largely concentrated in the U.S. and EMEA. They formed about 73.2% of the S&P Global Ratings-rated ABCP issuances outstanding in these two regions, largely stable since December 2018. The top three sponsors hold about 35% of the total issuance volumes in the U.S. and EMEA, up from about a third previously (see chart 13).

Chart 13

In the U.S, the top 10 sponsors, administrators, and managers accounted for 85.1% of the total ABCP outstanding as of December 2019 (see Appendix). Three of the top 10 sponsors and administrators accounted for about 26% of the total ABCP outstanding in eight partially supported conduits as of December 2019 (see Appendix). The top 10 liquidity providers provided a combined commitment of approximately $257.5 billion, or 83%, of the $311.2 billion of support available for the U.S. ABCP that we rate.

In EMEA, the top 10 sponsors of the outstanding ABCP issuances accounted for 90.4% of the total ABCP outstanding as of December 2019, higher than 88.3% as of December 2018 (see Appendix). The top 10 liquidity providers provided a combined commitment of approximately $106.5 billion, or 83%, of the $128.4 billion support available for the EMEA ABCP that we rate.

Rating Actions

• White Plains Capital Co. LLC Rating Affirmed; Ratings Then Withdrawn At Issuer's Request, April 15, 2020
• New Issue: Mackinac Funding Co. LLC, Feb. 26, 2020
• New Issue: GTA Funding LLC, March 27, 2020

Related Research

• Economic Research: COVID-19 Deals A Larger, Longer Hit To Global GDP, April 16, 2020
• An Already Historic U.S. Downturn Now Looks Even Worse, April 16, 2020
• Credit FAQ: Will Recent Outlook Revisions On Australia And Australian Banks Affect Structured Finance Ratings?, April 13, 2020
• U.S. Commercial Small-Ticket ABS Will Be First In Sector To Feel Impact Of COVID-19, April 13, 2020
• Assessing The Potential Credit Effects Of COVID-19 On U.S. ABCP, April 9, 2020
• Credit FAQ: How Will COVID-19 Affect Japanese Structured Finance?, April 8, 2020
• European Banks' First Quarter Results: Many COVID-19 Questions, Few Conclusive Answers, April 1, 2020
• European ABS And RMBS: Assessing The Credit Effects Of COVID-19, March 30, 2020
• Economic Research: COVID-19: The Steepening Cost To The Eurozone And U.K. Economies, March 26, 2020
• Credit FAQ: How Will COVID-19 Affect Australian Structured Finance?, March 25, 2020
• Credit FAQ: Assessing The Credit Effects Of COVID-19 On U.S. And Canadian Credit Card ABS, March 25, 2020
• Stress Scenarios Show How U.S. Bank Ratings Could Change Amid Pandemic-Induced Financial Uncertainty, March 24, 2020
• Credit FAQ: Assessing The Coronavirus-Related Damage To The Global Economy And Credit Quality, March 24, 2020
• The European Central Bank Rises To The Challenge As Eurozone Sovereign Borrowing Soars In Response To COVID-19, March 19, 2020
• Economic Research: COVID-19 Macroeconomic Update: The Global Recession Is Here And Now, March 17, 2020
• COVID-19 Credit Update: The Sudden Economic Stop Will Bring Intense Credit Pressure, March 17, 2020
• Economic Research: A U.S. Recession Takes Hold As Fallout From The Coronavirus Spreads, March 17, 2020
• COVID-19 Countermeasures May Contain Damage To Europe’s Financial Institutions For Now, March 13, 2020
• COVID-19 And Falling Rates Cloud The Outlook For U.S. Financial Institutions, March 10, 2020
• Large U.S. Bank Earnings Should Remain Buoyant, Despite Margin Headwinds In The Fourth Quarter, Feb. 13, 2020
• Inside Global ABCP: Expanding Portfolios Underpin Steady Issuance, Though Market Uncertainties Persist, Oct. 23, 2019
• ESG Credit Factors In Structured Finance, Sept. 19, 2019
• When The Cycle Turns: How Would Global Structured Finance Fare In A Downturn?, Sept. 9, 2019
• Methodology For Linking Long-Term and Short-Term Ratings, April 7, 2017

Appendix

The appendix tables are available here: https://www.spglobal.com/ratings/_division-assets/excel/69InsideGlobalABCPAppApril2020.xls